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I though some discussion about ENRON's (ENE)so far unofficial demise might
be interesting. Below is an extract from an analysis/news service to which I
subscribe. The conclusion is that gas prices will rise. The objective of
this post is to hear of varying ways one can profit from this perception.
After Enron: Higher Energy Prices
2200 GMT, 011129
Summary
Reverberations from the collapse of Enron Corp., the United States' largest
energy trader, will be felt for some time. The biggest winner is Dynegy
Inc., the only company that can easily incorporate Enron's assets into its
own operations. But U.S. consumers will lose: Enron developed an efficient
method of getting energy to customers. As the power market reworks itself to
compensate, natural gas and electricity prices are sure to rise sharply.
Analysis
Enron Corp., America's largest energy trader, collapsed spectacularly this
week.
With analysts only now picking through the debris of the company, which was
the United States' seventh-largest company and biggest energy trader, it is
apparent that no company other than Dynegy can pick up more than tidbits
from Enron. The company is simply too large to be replaced. That's great
news for Dynegy, the new industry leader, but signals increased costs for
power producers, distributors and consumers alike.
One immediate effect of the company's collapse will be higher heating bills
this winter. The low price of oil had raised expectations that winter fuel
costs would be much cheaper than the record highs of last year, but as the
market reshapes itself around Enron's corpse, that hope is shrinking into
oblivion. Neither the rising costs nor the collapse of one of its largest
companies will help the United States as it attempts to shake off a
recession.
Enron will enter the history books as a well-executed revolutionary idea
that was sabotaged by cronyism and which left mixed results.
On the positive side, the company successfully demonstrated that power
trading was a uniquely efficient way to manage the United States' patchwork
of power generators, utilities and distributors. Prior to the power-trading
era, much of the country's trading was point-to-point: Individual producers
sold their natural gas and electricity to individual distributors and
utilities. Enron inserted itself between these groups, buying power from
providers across the country and reselling it to a variety of buyers. In
effect Enron engineered vast economies of scale by managing the energy
sector's risk nationwide. For energy consumers, producers and retailers,
this meant more reliable and cheaper contracts.
On the negative side, power trading depends upon the marketer having deep
reserves of good credit. Good credit is not maintained by writing down $1.2
billion in shareholder equity and overstating earnings by $586 million, as
Enron has admitted doing. Once it leaked that Enron's books were cooked and
senior officers were accused of fleecing the company, all three major
credit-rating agencies -- Fitch, Moody's and Standard and Poor's -- tripped
over each other in the rush to cut Enron's credit rating.
Any energy trades now must be backed with hard cash. When Dynegy abandoned
its planned buyout on Nov. 28, Enron's rating was cut to junk status,
bringing forward $3.9 billion in debt for immediate repayment.
That reduced Enron's cash reserves to zero; it cannot even pretend to
service its contracts. Loans are impossible as Enron put up most of its few
assets as collateral in the past two months simply to stay afloat. Its last
scrap of cash likely disappeared Nov. 28 when it suspended EnronOnline, the
Internet trading operation that accounted for 90 percent of its business.
With no credit, no unclaimed assets and no cash, Enron is now unofficially
dead. At last check, its stock was valued at 33 cents per share.
Now, the United States faces a unique problem. Enron brokered about 25
percent of the U.S. power market, and revenues in the year to Oct. 1 totaled
$140 billion. It is by far the largest U.S. company to crash, and no single
company can even pretend to absorb all of its business.
Dynegy, now the single-largest player in the U.S. energy market, can absorb
a portion, however. Dynegy shrewdly negotiated its early takeover plan and
should be able to snag the 16,500-mile Northern Natural Gas Pipeline network
from Enron. That would give it a dominant position in a swath of territory
stretching across the Midwest from the Canadian border to northern Texas.
But Dynegy holds only about 5 percent of market share. It lacks the
bandwidth to absorb all of Enron's contracts, which would quintuple its
size. Also, Dynegy leaders are far more conservative than Enron's when it
comes to expansion -- as evidenced by their ultimate refusal to take a risk
on the Enron merger, even with the backing of partner ChevronTexaco. With
Enron's spectacular collapse, the tendency toward caution has certainly been
reinforced.
Many of the contracts Enron serviced will revert to point-to-point
operation, but because many of its customers dealt only with Enron, they
have long since dropped their marketing arms. Enron's collapse catches them
all off-guard. Instead of selling their power to Enron, they must locate and
negotiate with individual consumers. This will add time, risk and cost to
each step of the process.
This large-scale switchover from pooling to point-to-point will be
laborious, chaotic and hugely expensive.
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